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Five warning signs your business is on the verge of making a loss

If your business was making a loss or was on the verge of becoming insolvent, you’d know all about it. Sounds obvious, doesn’t it? Yet without the right accounting processes, it can be genuinely difficult to know whether you are operating a loss-making business or a profitable company that’s simply experiencing short-term difficulties. So what are the warning signs that your firm could be in terminal decline?

2 Your profits and net assets have been declining for more than four consecutive quarters

Even if you’re still profitable, steadily declining profits are a clear indication you could be heading for a loss. Similarly, if the company’s net worth is less than zero or is continually falling, you could be bound for insolvency. Either way, it’s a clear warning to start paying more attention to your income and expenditure, as failure to do so could prove fatal.

3 Your debts exceed your assets

To evaluate your true financial position, start thinking like a debt recovery professional. They evaluate companies using a current ratio (also called a cash ratio), which calculates the total amount of debts and liabilities compared to the total assets (including cash at bank, outstanding sales invoices and more). If what you owe exceeds what you own and what you’re owed, then you need to restructure rapidly if you hope to stay in business.

4 You’re not winning new business

Every company goes through periods of growth and consolidation. But if you haven’t won any new contracts, taken on additional orders from existing customers or progressed in any other way for a while, it’s a sure sign that you’re stagnant and likely to be suffering cash flow problems. Of course, this isn’t a problem if you’re enjoying a satisfactory level of income and profitability. But if you’re having trouble paying your creditors, stagnancy is the beginning of the end, since the loss of just one key customer could cause your company to go under.

5 Your cushion is getting thinner

The margin between what you make and what you spend each month is called the “cushion”, and it represents your cash flow and the funds you have to service debt. With most failing business, the cushion gradually thins out, reducing their options if things take a sudden downturn. If your company has little room for manoeuvre each month, this could mean you’re close to generating an operating loss. Try to address this by ensuring a margin of error of no more than 20% in your monthly budget, and remain aware that if you’re struggling to meet your expenses or control your costs then you’re heading into trouble.

By Carl Faulds | 20th June 2016

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